“There’s only two things I hate in this world: people who are intolerant of other people’s cultures and the Dutch.” – Austin Powers in Goldmember
Read this blog or this man will shoot that car.
People can be stupid.
People in groups are almost always stupid, and they can remain stupid until they do quite a lot of damage.
Let’s take a trip off to Europe (unless you already live in Europe) and back in time to 1636 A.D. (unless you already live in 1636 A.D.) and review the price of . . . flowers???
The Dutch (at least I think that’s what they call the people from the Netherlands, but you can call them Sven or Maria or whatever suits you) in 1636 were a seafaring bunch, who made money trading all over the world and had colonies in North America, South America, South Africa, India and all those islands between Asia and Australia. One thing that a Dutch guy brought back (and I don’t think this one was lost) in addition to the most efficient way to remove hair and lint from your bellybutton was the tulip.
In a parallel development, the Dutch were big on trading stocks in companies, like the Dutch East India Company, or in commodities like sugar or pancake mix. The markets were sophisticated. In 1632, you could buy sugar for delivery in 1633. This was nice if you wanted to guarantee your sweet tooth, but you could also trade that contract to somebody else for a higher price if they decided they needed the sugar to make PEZ® or Fruit Pies. Nowadays we call those “futures” contracts. Yup, the Dutch were doing this 400 years ago.
But a slight change in laws made those contracts different. The buyer could buy the right to buy sugar. The seller had to fulfill the contract, but the buyer had no obligation to buy it. It was his or her (yup, plenty of Dutch female speculators) option to buy the sugar. This is what is now known as “futures options.” And you could buy them on . . . anything.
In November of 1636 something must have broken in the minds of a batch of silly dead (now, not then) Dutchmen and women. They started bidding up the futures options contracts on . . . tulips. And various colors and varieties became more valuable, especially one that that had a virus that changed and made a tiger-striped pattern. They looked awesome. But one tulip bulb went for the same price as ten years’ worth of a typical laborer’s wages. That’s $250,000 or $300,000 today. For a tulip bulb.
There appears to be little record of people going broke in big numbers when the bubble burst, but certainly there were some people who came out a bit poorer, and the entire reputation of traders was ruined. Not that it was that great in the beginning, but Jan Brueghel the Younger painted the fine painting below, Satire on Tulip Mania, depicting the traders as monkeys. If you look closely you can see the nifty tiger-striped tulip in the left corner. Myself? I’d pay much more for a monkey that traded futures options contracts, even if he did a lousy job.
Yes, it’s public domain, being nearly 400 years old, unless Disney® wants to try to make a movie about it….
This was the first recorded financial insanity of this type, and it was fairly benign.
What other manias occurred during history? Well, lots. But researching them all would take quite a lot of work, and far more wine than I have in the house right now. So, let’s just look at the ones that I want to talk about:
- Salem Witch Trials – 1692 to 1693. Twenty people executed when a bunch of kids played a prank. Or there were real witches. This is still a bubble, but it was just teen angst magnified a zillion times. Fortunately, they had awesome wood floors, like in the picture below. Are those oak? I’m so jealous!
- The South Sea Bubble – in 1720, the price of shares in the British South Sea Corporation went from £100 to £1,000 (the £ is the funny symbol that British people use for money). Sounds like a great deal, right? Well, the records seem to indicate that the South Sea Corporation spent most of their time issuing stock and very little time on actually, you know, making money. So why did so many people (including Isaac Newton himself) shove all of their spare £ into a company that just made stock? Isaac Newton is reported to have said: “I can calculate the movement of the stars, but not the madness of men.” Apparently Newton couldn’t manage £1,000-£100=£ Below is a public domain picture by dead artist Godfrey Kneller of Isaac Newton when he was in his “looking like the guitarist from Queen” phase.
- Radium – 1920’s to late 1930’s. Everything had radium in it or was named after radium. Drinking water. Watches with glow in the dark faces. My college mathematics classroom (yeah, after I took Calculus I, Calc II, Calc III and Differential Equations in the same room? Enough radioactivity to power all of North Korea and a lot of corpses that are technically nuclear waste. I have a straight razor case from the era. You guessed it: “Radium Straight Razor Company.”
- 1920’s Stock Bubble – The classic. Fueled by post World War I enthusiasm and the rise of new technology (radio, the automobile, phones, and PEZ®) people went . . . insane. Everybody was investing in the stock market, including a shoeshine boy, who famously gave Joe Kennedy (father of President John F. Kennedy) a stock tip. Kennedy then decided if shoe shine boys were involved in the stock market, too many people were in the stock market. He then proceeded to smuggle a bunch of liquor and manipulate a senator or two, then lunch.
- Hula Hoops™ – Watch The Hudsucker Proxy to see exactly how this was invented. Okay, I kid. But the Hula Hoop® hit when Hawaii was just becoming a state, and there was a large mania about the place, even though it had been a part of the US for nearly a century. 100 million were sold within two years, despite the US population being only 180 million at the time. Sales fell off when people were finally told that there wasn’t a limit on the number of times a hoop could be hooped prior to it wearing out.
- Johnny Carson’s Toilet Paper Run – in 1973, Johnny Carson (a late night television host back when there were only three channels and who was very popular) noted that there was a toilet paper shortage, but was referencing commercial grade toilet paper. He used that to make a few jokes. (Toilet paper is just plain funny). People took him seriously, and pretty soon there were shortages and rationing of consumer grade TP in several cities. Shortly after the commotion, Carson told his audience he was joking. People in the US could again poop without fear.
- Pet Rocks® – A rock. As a pet. For money. Broke sales records, until people figured out that they’d paid $3.95 (plus tax) for a rock.
- Cabbage Patch Kids© – A really ugly doll, but middle-aged women jumped out in droves to fight each other in a series of battles that would have made the gladiators of the Colosseum in Rome proud, if they had been middle-aged women with purses the size of four year old children fighting each other for dolls in the aisles of K-Mart®, Montgomery Ward™ and Sears©.
- Beanie Babies™ – A really cute doll that spiked in popularity in the late 1990’s. The creator of the company decided to make special “limited runs” of a cheap, plush doll that looks like a dog’s chew toy. Middle-aged women fought each other in the aisles for these as well, but it was the 1990’s so they all had greasy ham-hair like Kurt Cobain. After a brief spike of popularity, most Beanie Babies are worth . . . dog chew-toy value. There are a very few that might be worth some change, but don’t hold your breath.
- Dotcom Bubble – The thing I wrote about Beanie Babies™ above? Just replace “Beanie Babies®” with “stocks” and “Middle-aged women” with “greedy but stupid baby boomers.”
- Tasers© – At one point in 2004, Taser™ the company would have had to sell three Tasers® to every person in the United States to make the profit the stock $150 stock price implied. We didn’t buy the Tasers®, and neither did you, so you can buy the stock for $20 or so.
- Housing Bubble –House prices never go down. It’s a fact! Except when it’s not and imperils the entire economy of the world.
- Tesla® – I’m not saying it’s a bubble (LINK), but it’s a bubble. Tesla© is not worth more than Ford™.
Most of the bubbles or manias I’ve listed above share a similar pattern –
- Start – The guy started making Beanie Babies®. They only sold a few.
- Spark – A reviewer mention in an article that some are “valuable” and “rare”.
- Information Spread – Engage middle-age lady network.
- Publicity – News stories show up in newspapers, television.
- Mania – Nobody wants to be left behind, so everybody buys all the Beanie Babies®.
- Market Collapse – Somebody writes an article questioning paying $10,381 for a dog chew toy. “Bubbles burst when fools run out of money.”
- Regret – Closets of Beanie Babies© sit in closets, since one day they’ll be valuable.
- Next Mania – Well, maybe next time I’ll be in first and make all the money…
And financial markets work exactly the same way, but with less dog chew toys. People want to seek a return on their money, and when there’s enough money just lying around, stupid investments get made. And some of those investments pay off in a huge way, especially for those that got out early. The Dotcom crash? Plenty of people sold as it was on its way up, and made huge amounts of money. The housing crash? One guy predicted it and put in place investments so that he made hundreds of millions off of the crash.
But sometimes what looks like a bubble . . . isn’t a bubble. It’s a trend, and a real trend based on sound, rational economics. The guy who was sure that the smart phone was a fad (me), the guy who thought that credit cards would never catch on with a rational public (my dad), and the guy who thought that Europe would be plunged into a horrific war (my great, great grandfather). Oh, wait, the last guy was right.
And sometimes there are bubbles, and sometimes there are trends. One person working to figure out the difference is a geophysicist named Didier Sornette, who has an amazing Wikipedia page (LINK), and looked at the mathematics that surrounded earthquakes and compared it to stocks or other financial assets in a bubble. Turns out that the bubble was analogous to a really stressed mass of rock. He made some predictions after the Dotcom bubble, and was right enough that he got hired to just study financial crises in Zurich (LINK). Tough duty.
When you think a deal is too good to be true, or you see a group of people jumping on a bandwagon, think twice (cough Tesla® cough). You want to avoid the Hula Hoop® Witches™ without Toilet Paper.
This blog is NOT stock advice, I don’t own any positions in anything mentioned, and don’t plan on any for the next month or so.